To improve affordable housing, a B.C. economist says the province needs a more progressive property tax system — one that raises levies on high-value properties and people who own multiple homes.

Such a policy, says Alex Hemingway, will raise billions of dollars for public housing projects while simultaneously dampening home price growth over the long term.

The policy proposal, laid out in a white paper published Wednesday with the Canadian Centre for Policy Alternatives of B.C., comes as residential property values have grown a “staggering” $1.7 trillion over the past two decades, leading to greater inequality among those who own a home and those who don't, says Hemingway.

“In terms of addressing the inequality that’s been created, that’s really where property tax comes front and centre,” Hemingway told Glacier Media in an interview.

Because property tax reform is both complex and contentious, Hemingway is calling on a citizen’s assembly to discuss options.

12% of B.C. households would pay more, says economist

Hemingway's proposals largely focuses on greater taxes on the priciest properties in B.C., but also reforms along the edges, such as greater emphasis on taxing land and not buildings, as a way to incentivize denser forms of housing.

To raise an extra $580 million annually, Hemingway proposes doubling the existing provincial property surtax on residential properties valued above $3 million (to 0.4 per cent) and $4 million (to 0.8 per cent), as well as adding a new bracket above $7 million (1.5 per cent).

To raise even more money, Hemingway suggests the provincial government apply extra property taxes on owners of multiple homes and properties valued at over $1.5 million. In such a scenario, just 12 per cent of B.C. households would pay more, adding about $2 billion for public housing projects.

That surtax, known as the Additional School Tax, was brought in by the BC NDP government in 2019 and is opposed by the opposition party, BC United.

“The B.C. government has taken some important but limited steps in recent years when it comes to taxing residential property wealth,” said Hemingway.

Lack of public investment adding to cost-of-living crisis

Hemingway said the existing surtax is a “drop in the bucket,” compared to recent gains in property values, which currently climb around $223 million annually.

Despite political opposition, Hemingway says polling shows high public support for taxing the wealthy.

“People recognize [higher home values] has been a stroke of luck, and it’s unintentionally come at the expense of others. And that’s corrosive on our social fabric,” said Hemingway.

Hemingway says public spending as a percentage of GDP has declined over the past generation.

“That lack of public investment has contributed to some of the cost-of-living crisis we’re seeing. And that’s why it’s sensible to be thinking about raising additional revenue,” he said.

Hemingway further proposes more complex changes to the current property tax scheme. By shifting tax away from buildings to the land itself, the government could incentivize building denser forms of housing, which Hemingway supports.

Hemingway says it’s also worth considering a consistent property tax rate, as opposed to having it fluctuate (historically downward) to align with government budgets.

“A first step would be to stop automatically cutting provincial property tax rates when property values rise faster than inflation. Holding rates steady wouldn’t raise much revenue initially, but if property values continue escalating, it would raise revenue and ensure more land value gains are captured for the public good,” wrote Hemingway.

To address declining property values, Hemingway suggests a rate floor, especially in regions where home prices are extremely out of line with local incomes.

Hemingway says governments may also want to consider expanding property tax payment deferrals until a property is sold. Currently, the deferral program only exists for homeowners over age 55 and families.

Under a higher property tax scheme, Hemingway said “we may want to expand and if not universalize that option.”

At the heart of Hemingway’s proposal is an effort to disincentivize housing, or land, as an asset class.

Open to 'tax shift' proposal to lower burden on low and mid-level earners

While not including it in his proposal, Hemingway says he supports a plan backed by the think-tank Generation Squeeze that would lower income and sales taxes to offset any hike in property taxes.

The plan seeks to cut provincial income tax on the first $30,000 an individual earns. B.C.’s second income tax rate would be eliminated, leaving earnings from roughly $40,000 to about $79,000 taxed at the rate of 5.06 per cent rather than 7.7 per cent. Furthermore, British Columbians would pay a provincial sales tax between five and seven per cent — all in exchange for a property surtax on properties valued at over $1 million.

“Right now we shelter housing wealth, especially high housing wealth, from taxation and we disproportionately draw on income taxation, including from middle and lower income renters, who aren’t benefiting from massive housing wealth growth,” said Paul Kershaw, a professor in public health at the University of British Columbia and head of Generation Squeeze.

Kershaw says his “tax shift” proposal — aimed at addressing generational wealth inequities — is needed to pay for the growing social and health needs of an aging population. For that reason, he said it only makes sense to draw revenue from that source, which happens to own much of the land in the province.

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Prices continued to edge upwards in the Canadian resale market last month — seeing a near-record rise, no less — but the same can’t be said for the new home segment, underlining the considerable headwinds facings homebuilders across the country.

Statistics Canada’s (StatCan) new housing price index fell by 0.1% between June and July, not only erasing the 0.1% increase observed the month prior, but marking the first dip since May. Prior to May, national new home prices had been trending downwards since August 2022.

New home prices slipped the most month over month in Victoria (-0.8%), followed by Greater Sudbury (-0.7%), Regina (-0.5%), and Ottawa (-0.5%), “with builders in many CMAs noting weakened market conditions as the reason for the reported monthly declines,” said StatCan on Monday.

Conversely, prices edged up month over month in Sherbrooke (+1.2%) and St. John's (+1.0%).

Year over year, new home prices slid 0.9% nationally. StatCan attributes this to borrowing costs, which have risen steadily since July 2022 and have served to hamper the new housing market. The government agency also points to the fact that there was 54.2% more unabsorbed inventory (single-family homes completed but not sold) in July 2023 over July 2022, according to the Canada Mortgage and Housing Corporation.

Locally, Victoria also led the year-over-year decline in July, with new home prices falling 3.7%. Prices also slipped in Edmonton by 2.9%. Meanwhile, the greatest year-over-year increases were observed in Québec (+3.5%), Calgary (+1.6%), and St. John's (+1.6%).

Industry “Downbeat,” Says Home Builders’ Associations

July’s overall price slide is another burden to bear for Canadian homebuilders, 67% of which are already scaling back their building endeavours given the pressures of the times according to a recent report for Q2-2023 from the Canadian Home Builders’ Association (CHBA).

What’s more, out of fear that they won’t secure the buyers necessary to render their projects worthwhile, 22% told CHBA they are axing projects completely.

“While the spring busy season helped prospective new home sales traffic somewhat, affordability challenges related to interest rates and construction costs remain very much a concern, and have been compounded by the July rate hike by the Bank of Canada shortly after Q2 survey data was collected,” said the organization earlier this month.

“Converting prospective buyers into sales remains a challenge, as do closings from previous sales. Due to the high interest rate environment, nearly half of CHBA’s panelists reported that buyers are requiring alternative lending solutions and one-third said they are needing to make accommodations for some buyers so they can close.”

All in all, said CHBA, the Canadian homebuilding industry “remains downbeat,” which spells dismal things for not only homebuilders, but the housing market at large.

New data from Canada Mortgage and Housing Corporation (CMHC) shows actual housing starts in Metro Vancouver over the first seven months of 2023 through the end of July were up by 50% compared to the same period in 2022.

A total of 211 single-family detached housing starts were recorded in July 2023 — down from 276 in July 2022.

But for all other housing types, a broad category that includes apartments, CMHC recorded 2,751 actual housing starts in July 2023 — up from 1,700 over the same month last year.

The total number of housing starts in Metro Vancouver in July 2023 reached 2,962 units — up from 1,976 in July 2022.

Province-wide, British Columbia saw a total of 4,002 housing starts in July 2023 — slightly up from 2,798 units in July 2022.

Generally, housing starts are defined as the beginning of construction work on the building.

For housing starts seasonally adjusted at annual rates (SAAR), based on a six-month moving average, CMHC recorded a total of 35,438 units in Metro Vancouver as of July 2023 — down from 46,282 in June 2022. Provincially, this rate was down by 25% to 47,730 units.

Nationwide, housing starts SAAR in July 2023 increased for the second consecutive month.

“Despite a decrease in the SAAR of housing starts relative to last month, July saw a healthy number of actual housing starts from a historical perspective. This pushed the trend of housing starts upward for the second consecutive month. Market intelligence suggests multi-unit projects started in June and July were likely financed a few months prior, so the effect of the most recent interest rate hikes on housing starts remains to be seen,” said Bob Dugan, the chief economist of CMHC, in a statement.

According to MLA Canada’s separate account for the combined areas of the real estate boards of Greater Vancouver and the Fraser Valley, there were five pre-sale project launches in July 2023 with a combined total of 326 pre-sale units. This is down from their June 2023 tally of 16 project launches with a combined total of 1,849 pre-sale units.

In anticipation of falling interest rates, home sales and prices began to rise across Canada in February as sidelined buyers returned to the market. Although the Bank of Canada reignited its rate hike campaign in June, both metrics have continued to climb.

According to the latest figures from the Canadian Real Estate Association (CREA), home sales rose 1.5% month-over-month in June, while the Aggregate Composite MLS Home Price Index climbed 2% -- a "large increase for a single month."

From January to June, the unexpectedly frenzied spring market led sales activity to soar nearly 400% in some cities, while prices increased by as much as 19%.

With purchasers seemingly unperturbed by rising rates, Zoocasa compared home prices and sales activity from January and June to determine where buyers have bounced back.

Nationally, home sales have more than doubled, up 139.62% in June compared to January. But, of the 23 cities included in the real estate agency's report, 15 have seen even greater gains, while only one has seen sales rise by less than 100%.

Guelph experienced the most significant increase -- the number of homes sold in June was 387.38% higher than in January -- followed by North Bay, which recorded a 366.67% increase in sales over the same time period.

As the report notes, though, the aforementioned markets are on the smaller side and saw fewer overall sales -- 424 and 126, respectively, in June. When looking at larger cities with over 1,000 sales per month, Fraser Valley experienced the largest increase in activity, at 214.46%.

The Greater Toronto Area saw the highest number of home sales overall in June, at 7,480, a 141.29% jump from January, while Calgary's 3,996 sales marked a 162.38% increase from January.

The only region to not experience at least a doubling of sales was the Quebec CMA; activity was up 42.8% in June compared to January.

With sales soaring, and inventory low, prices have begun to creep up as well. The national average price hit $760,600 in June, a 7.89% increase from January.

In Sudbury, where sales have risen 195% since the start of the year, prices have increased by 19.22%. Despite the jump, the city's average home price of $456K is still considerably affordable.

Sitting at a comparable $408,900 in June, prices in North Bay have risen 11.57% since January. Even Quebec, with its comparatively slower increase in sales, saw prices rise 6.66% to $337,800 from January to June.

Concerning large markets, Fraser Valley once again led the way -- the city's average home price hit $1,040,900 in June, a 10.82% jump from January. The GTA trailed, with prices increasing 9.41% to $1,171,300 from January to June.

Montreal sat at the other end of the spectrum, with prices rising just 3.45% to $516,400. The city saw sales jump 102.51% from January to June.

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